Pakistan’s power sector is an enigma that continues to hold back the country’s economic potential. Despite substantial investments in generation capacity over the past few decades, distribution remains the weakest link in the energy chain. Power distribution companies (DISCOs) continue to bleed, with transmission and distribution (T&D) losses reaching over 17 percent, nearly double the global average. Coupled with poor revenue collection, where DISCOs recover only 90 percent of billed amounts, the sector’s finances remain fragile, feeding into a vicious cycle of circular debt, which now stands at around PKR 2.5 trillion.

Without urgent reforms, the energy sector will remain a bottleneck for industrial growth and development. The key to resolving these issues lies in addressing the inefficiencies that have plagued the distribution segment for years.

A potential solution lies in Private Sector Participation (PSP), as per the World Bank Pakistan Development Update (October 2024). The report outlines PSP has proven successful in other countries like Turkey and Brazil, where privatization or public-private partnerships (PPPs) have injected much-needed capital, efficiency, and management expertise into the sector. However, for Pakistan to succeed with PSP, a robust regulatory framework is critical to ensure that private participation benefits consumers and doesn’t lead to higher tariffs.

Accountability is the first area that must be addressed. One effective way to enforce accountability is by implementing performance-based contracts for DISCO executives. Tying executive compensation to clear benchmarks such as reduced losses and better collection rates would create a strong incentive for improving performance. Additionally, Nepra must ramp up its oversight role, ensuring that service delivery standards are upheld while preventing excessive tariff increases.

The consumption patterns have been taken for a ride in the past three years, putting more strain on the sector’s health. The consumption-based subsidies have widened the gap, as the World Bank highlights how the indirect effects of higher energy prices are larger for poor, vulnerable, and middle-class segments. The subsidy system in place results in Pakistan spending 90 percent more than it is necessary if more targeted mechanisms were in place. Over the past three years, the share of household consumers with demand in excess of 400 monthly units has shrunk from 10 percent to just 1 percent, largely due to the shift to solar, while they continue to be recipients of subsidies in off-peak seasons. This cannot continue.

Infrastructure improvements are equally vital. The current state of Pakistan’s power distribution grid is outdated, leading to frequent power outages that disrupt industrial production and daily life. With much of the grid infrastructure in need of modernization, a targeted upgrade program is necessary to reduce inefficiencies, boost reliability, and lower T&D losses. International financing, particularly through development partners like the World Bank, could play a crucial role in financing these upgrades.

Privatization remains a contentious issue, with strong resistance from labor unions and political factions. However, a phased approach involving concessions, where operational control of discos is handed to private companies for a fixed period, could be a more politically viable alternative to full privatization. This approach would allow private players to bring in management expertise, while the government retains ownership. Moreover, transparent bidding processes are essential to ensure that the transition is done fairly and in the best interest of consumers.

The need for reform is urgent. As outlined in the World Bank Pakistan Development Update (October 2024), Pakistan’s energy sector is facing critical challenges that must be addressed to ensure long-term economic stability. Political will and decisive action are paramount to reforming the power sector and alleviating the circular debt crisis. While reforms will face opposition, particularly from vested interests, they are necessary for the country’s economic future.

The clock is ticking. Pakistan’s energy sector is holding back economic growth and development. Without timely and bold reforms, the country risks falling further behind. By modernizing infrastructure, improving accountability, and gradually bringing in private sector participation, Pakistan can overcome its energy woes and unlock its economic potential. The time for change is now.